B. of A. sees housing prices rising in 2012

AlexandraScaggs

--Bank of America/Merrill Lynch says housing prices to begin rising this year

--Inventories have fallen and policy moves have helped stoke demand for homes

--Firm's long-term view unchanged, but now says housing recovery to start earlier, be more gradual

NEW YORK (MarketWatch) -- Bank of America/Merrill Lynch is calling for a bottom in housing prices this year, thanks to improving economic data and government-policy developments.

The firm has adjusted its forecast from November, when it expected home prices to fall 3.5% in 2012. Now, it expects a gain of 0.5%.

"But, along with the earlier bottom is a slower recovery," says the firm. For example, it expects home prices to gain 2.8% in 2014, solidly below its prior estimate of 8.1%. Its prediction for 2020 remains roughly the same, when it expects home prices to have recovered by 42%.

Inventory dropped sharply in the second half of the year, according to the firm's research. And while BofA/Merrill expects those numbers to pick up a bit, because winter's unseasonable warmth may have already supported home sales, it now expects lower inventory levels than previously thought. Also, recent trends of higher-than-expected job creation and record-low mortgage rates, the firm said, further support the case that housing is undervalued.

The note's authors--MBS/ABS Strategists Ryan Asato and Chris Flanagan and U.S. Economist Michelle Meyer--wrote that government policies have helped the market as well. While no recent moves have been a panacea for home prices, "they represent a positive step forward." The firm mentioned a settlement between U.S. State Attorneys General and U.S. banks on foreclosure practices and easier refinancing for homeowners as two of these.

However, the firm wrote that its outlook could easily change if policies or macroeconomic factors do. If the U.S. economy weakens again in the second half of 2012, housing demand will fall along with it and result in continued price declines. And even with this year's bottom, it will take years for the market to recover in full. "The bottom line is that although the housing market is healing, it is still far from a robust recovery."

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